Moody's pegs India's growth at 7.5% for next two years, says India insulated from turmoil

NEW DELHI | MUMBAI: India has emerged as the sole ray of sunshine in an OECD global forecast clouded with gloom. It’s the only large economy that’s been upgraded by the Organization for Economic Cooperation and Development, which pared growth forecasts for all the others. It has raised India’s growth forecast for 2016 to 7.4%, cut the global growth estimate to 3% and kept China’s unchanged at 6.5%.

In what will come as a boost for the Modi government, which has been drumming up investment at the Make in India Week, the OECD forecast followed positive comments by Moody’s. In its Global Macro Outlook released on Thursday, Moody’s said India is relatively insulated from external turmoil and put growth for the country over the next two years at a stable 7.5%. Stocks were buoyant, shrugging off recent tumult, and advancing for the second day led by positive global market cues. These included the US Federal Reserve’s comments that it may not consider a faster pace of interest rate hikes this year due to fragile global economic conditions and Iran coming to terms with Saudi Arabia and Russia to freeze oil output levels. The Moody’s report chimed with this sentiment.

The Sensex gained 1.14% to close at 23,649 points while the Nifty advanced 1.17% to 7,191, a shade below the immediate critical level of 7,200.

“India will continue to grow robustly, by 7.4% in 2016 and 7.3% in 2017,” OECD said in its report published on Thursday. OECD’s previous 2016 growth forecast was 7.3% for India and 3.3% for the world. China is expected to continue rebalancing its economy from manufacturing to services, with growth forecast at 6.5% in 2016 and 6.2% in 2017. By contrast, Brazil’s economy is experiencing a deep recession and is expected to shrink by 4% this year and will only begin to climb back up next year. Monetary authorities need to be proactive, OECD suggested.

“In emerging market economies, monetary support should be provided where possible, taking into account inflation developments and capital market responses,” it said.

WAGE BURDENMoody’s Investors Services expects India to reduce spending appropriately to provide for higher wages to government employees and stay in compliance with the fiscal consolidation road map unveiled last year. “The 23.55% increase in public sector salaries proposed by the Seventh Pay Commission is worth 0.7% of GDP,” it said. “The pay increase will also probably raise inflationary pressures. However, we assume the government will cut spending in other parts of the budget to maintain the deficit broadly in line with the 3.5% of GDP objective, thereby mitigating some of the inflationary effects.”

Many analysts expect the government to stretch the fiscal consolidation road map again this year, seeing the FY17 deficit at about the current year’s level of 3.9% of GDP in particular from overseas. Recent measures that allow 100% foreign ownership in many sectors will help further increases in foreign direct investment (FDI), it said. At the Make in India Week, which ended on Thursday, investment pledges added up to Rs 15.2 lakh crore ($222 billion).

SERVICES CUSHIONAccording to Moody’s, the services sector will provide some support to growth. “In a context of low growth in global trade in goods, India’s large services export sector (IT services account for about 18% of total exports) provides another source of resilience,” it said. The agency said the generally robust economic environment is constrained by “banks’ balance sheet repair and elevated corporate debt” and corporate pricing power being limited by the impact on food price inflation and households budgets of two consecutive droughts.” Global growth will fail to pick up steam over the next two years amid a slowdown in China, lower commodity prices and tighter financing in some countries.

“Together with Turkey and China among the G20 emerging markets, India benefits from lower commodity prices: in 2014, net commodity imports amounted to 5.9% of India’s GDP, compared with net exports worth 1.3%, 3.3% and 4.3% for South Africa, Brazil and Indonesia, respectively,” it said.

Headline inflation in India will depend on the weather during the planting season. Without particularly unfavourable weather conditions, it estimates inflation will rise from last year’s levels (4.9% on average) and fall back to the central bank’s target of 5% by early 2017.

Another year of moderate price gains will help anchor inflation expectations and foster both consumer spending and investment, Moody’s said.

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